Retirement Accounts: Don't Rob Peter To Pay Paul!

I'm Michel Martin, and this is TELL ME MORE, from NPR News. Coming up, we have the latest installment in our series Social Me. We'll talk about how educators could use their students' social media habits to figure out how they learn.

But first, to matters of personal finance: We want to talk about retirement. While earlier generations might have had a pension, now millions of Americans, if they have any savings, probably have some kind of retirement account like a 401K.

Well, our next guest says Americans are draining their 401Ks and other retirement savings accounts at an alarming rate, and that could have devastating consequences later on when they actually want to retire. Michael Fletcher wrote about this recently. He covers economics for the Washington Post, and he's with us now.

Welcome. Thanks so much for joining us.

MICHAEL FLETCHER: Good to be here, Michel.

MARTIN: So put this in perspective for us. How many people are we talking about here, and how much money are we talking about here?

FLETCHER: Well, the report from the financial advisory firm HelloWallet said roughly one-in-four Americans are tapping their retirement accounts for non-retirement needs, and that amounts to a bunch of money. That amounts to roughly a quarter of the nearly $300 billion a year people put into their retirement accounts. So, in essence, you have people putting money into these accounts, which have kind of high-risk investments, relatively high-risk, high-cost investments in terms of money management fees, and they're using them, essentially, as a rainy day or emergency fund.

MARTIN: Now, you wrote in your piece, according to this report from HelloWallet, that those in their 40s - people in their 40s - are more likely to do this, that actually a third of these folks are turning to these accounts. Why them? Why are these people more likely to do this than anybody else?

FLETCHER: People speculate about this. There hasn't been a full survey on that, but the idea is that, really, life happens to people in their 40s. People have homes. They may fall behind on a mortgage. They may have kids who are going to college. They may have two cars and one of the transmissions has gone up, and they don't have money elsewhere. So they turn to their 401K to sort of help them out of a sort of temporary financial crisis.

MARTIN: Why is this worrisome? Why are people so worried about this? And I note that this financial advisory firm isn't the only - aren't the only people to talk about this. The Senate committee issued a report in July that talked about this as part of a retirement crisis. Why is this so worrisome?

FLETCHER: It's very worrisome, because the other supports for retirement are slowly going away. You know, Social Security remains the mainstay, and lawmakers are even eyeing Social Security for trims going forward. But just 30 years ago, four out of five workers in the private sector had traditional pensions on their job. Not many people collected a bunch of money from them, but they still provided some measure of security. So you knew you were going to get X number of dollars per month for the rest of your life once you retired, and you didn't have to worry about managing that as a worker. Your employer took care of that, and you had that - you supplemented that with your Social Security payment and, you know, and you can make it through retirement.

In many ways, that's lifted the current retirees to sort of a higher standard of living than previous retirees have ever enjoyed. But now, that traditional pensions are going away, now one in five people have those. We're left to use our 401Ks as sort of the major mechanism for financing our retirements beyond Social Security.

So if you drain the money now, you're not going to have it later. And the power of the 401K really is in compound interest. So you have to keep - even if it seems like a little bit of money, you have to keep it in there. And if you keep it in there over a career of 30 or 40 years, when you get to the end, you should have a substantial amount money. But many people don't see their way to doing that.

MARTIN: Could you talk a little bit about some of the people that you interviewed in the course of, you know, pursuing this story? Why is it that people feel that this is where they have to turn for money?

FLETCHER: The trouble is that Americans are pressed financially from all sides. If you think about the traditional ladders of kind upward mobility in this society, you know, higher education - you were just talking about that. That's gotten more expensive. Health care has gotten more expensive, and wages have been flat for many, many people. The working class in this country has barely seen a raise over the last 10 or 15 years. So people are pressed, pressed financially.

I talked to one woman who's worked as a hotel housekeeper since the mid-1980s. She works in Baltimore, 62 years old, had hip surgery - a hip replacement operation this summer and is struggling with that, and is thinking about having to retire now because she doesn't see herself being able to work. And she had a 401K the entire time, and now has only $60,000. It sounds like a good amount of money, and most people, to say you have $60,000 somewhere, that sounds like something. But this will have to supplement her retirement for the rest of her life. She'll be able to collect Social Security right away, but she would have - she doesn't get Medicare until she's 65 years old, and that's not a lot of money.

But you talk to her about why, she says, well, I had home repairs. I had other financial things come up, and I really had no other source of money. And this woman made $13 an hour. So where was she supposed to save money? So that's the difficulty. I think people are financially pressed.

MARTIN: If you're just joining us, I'm speaking with Michael Fletcher of the Washington Post. He wrote about the growing number of people who are dipping into their retirement funds. It's actually a very large number of people. As many as one in three people in their 40s are doing that, and they're using this to pay for things that are not retiring. And we're talking about the possible consequences of that.

Michael, I wanted to ask, though, you know, the tone of a lot of the financial managers who write about this is kind of - how can I put it - judgmental.

FLETCHER: (Unintelligible)?

MARTIN: Well, you know - well, judgmental, which is, what's wrong with these people? And I just have to ask: Is part of it that, you know, trust is broken with the people who many people have relied upon to give them financial advice in, you know, over decades? I mean, is it that, you know, people were told that, you know, the banks don't want to foreclose, that they'll work with you? And then they find that they can't actually get anybody on the phone, that if they need to negotiate, you know, a job loss or a certain situation or they find that their, you know, retirement accounts or their savings accounts are not earning any money and, as you said, that, you know, people's wages have been flat for quite a long period of time.

And is it a situation where people just don't believe the kinds of people - the authority figures who they've been relying on all these years to give them advice, and they figure they might just go on their own and make the best decisions that they can make just right in front of them?

FLETCHER: Yeah. That could be part of it, but I think probably the larger issue is that people aren't getting any financial advice. I mean, it's sort of out there in the ether that you should save, you know, your 401K money. But people look at their balances and, particularly early on, they don't seem very substantial. You might have 1,000 or $2,000 dollars and a financial emergency arises, and it may not even be a full emergency. Sometimes people change jobs and decide, you know, I'll wipe out a few bills and move on, maybe buy a couple of treats for myself, you know, a couple of luxury items, a TV or something like that.

So I think it's a combination of people not really realizing the long term implications of tapping this money, particularly early in their careers.

MARTIN: But let me ask you, though, about this. Why doesn't it make sense for someone to take out a loan against their own retirement account at a favorable rate, like a 3 or 4 percent interest rate, instead of taking a loan out from a credit card company or some other, you know, vendor at 15 percent or 12 percent? Why doesn't that make sense?

FLETCHER: That makes sense when you frame it that way, but I think what people have to think about is sort of having different pots of money first. And it's easier said than done. Again, we just pointed out that people don't have the money. I think that's the underlying problem here, but, you know, the idea is that you should have an emergency savings account to deal with these sort of life things that are going to happen, the broken, you know, heating system in your home, the...

MARTIN: The transmission that goes out.

FLETCHER: ...need for a new car, the transmission that goes up in cost. We know - I mean, you know, thousands of dollars.

MARTIN: And so people are using that. It sounds like you're familiar with this. I'm just going to say, there's a level of detail here that sounds like you're familiar with this. What you're saying is people don't have that emergency fund, and they're using their 401Ks as their emergency fund.

FLETCHER: Yeah. And it's costing them a lot of money, and that's the thing, because it...

MARTIN: What - how much money?

FLETCHER: I mean, because when you withdraw - now, the loans are one thing. And the loans are probably the least damaging way of tapping your 401Ks. But many people are doing withdrawals, which puts you in line for a 10 percent federal penalty, plus you have to pay the deferred taxes on that income. So the income, when you earned it, that was put into the 401K, was not taxed. But once you withdraw it, you have to add that to your income tax bill for the coming year. So that becomes a substantial penalty.

MARTIN: So that's expensive money. That's expensive money. But for...

FLETCHER: That's expensive. But not only that, if it's in the stock market, you know, we know how volatile the stock market's been. If you happen to need that money at a down period, you're losing that investment income, too. You know, you could be at a down point in the market and need the money. So you're losing that. So you probably would have been better off having it in a money market or in a straight savings account.

MARTIN: OK. Michael, we only have a minute left, so I need to ask you this: Is there something - as we noted, this has gotten the attention of at least some lawmakers and policymakers. Is there something from a policy standpoint that's being contemplated here?

FLETCHER: Well, the things that - Senator Harkin is one of the people talking about the need for another tier of retirement savings in this country to supplement Social Security. It seems unlikely that that will happen, but he's talking about the need for that.

Beyond that, some people have talked about the idea of making it more difficult for people to tap their 401Ks, but the complication there is that surveys have shown that if people know they can't tap that money, they're less likely to participate in 401Ks to begin with.

MARTIN: Interesting.

FLETCHER: And there's a problem there, as well.

MARTIN: Michael Fletcher is a reporter for the Washington Post. He was kind enough to join us from their studios in Washington, D.C.